Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
We look at the latest from the UK short term lending market as another big lender withdraws.
But why inaction here?
https://www.fca.org.uk/data/consumer-credit-high-cost-short-term-credit-lending-data-jan-2019
https://www.bbc.com/news/business-49878277
https://www.bbc.com/news/business-50174367
https://www.theguardian.com/money/2019/oct/25/quickquid-owner-collapses-into-administration
We discuss our latest research into the payday lending sector
ASIC says it has obtained orders winding up Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (BurleighHeads) Pty Ltd (the FAF Companies) for their failure to pay fines for breaching consumer credit laws. Mr Anthony Castley of William Buck has been appointed as the liquidator.
In March 2017, the Federal Court fined the FAF Companies a total of $730,000 after finding, in proceedings brought by ASIC, that the FAF Companies breached consumer credit laws by engaging in credit activities without holding an Australian credit licence.
The FAF Companies operated under a business model where consumers seeking small value loans were required to sign documents which purported to be for the purchase and sale of diamonds in order to obtain a loan. The reality was that there were no diamonds and it was a sham designed to avoid consumer credit laws.
Background
ASIC was successful in obtaining orders against the FAF Companies in September 2015 and fines were imposed in March 2017 (refer: 13-205MR and 17-060MR).
National not-for-profit, Good Shepherd Microfinance, has made a bold move into online lending with the support of NAB to launch Speckle – a fast online cash-loan which offers a better alternative for people seeking small cash loans under $2,000.
They also cite our updated research on the Pay Day Loan market in Australia.
We think this is a significant move, and could tilt the lending landscape towards consumers, who according to our research are more likely to reach for short term credit, thanks to wages and costs of living pressures, and the greater availability on online finance. Speckle is a cheaper accessible alternative.
With an increasingly casual workforce, the rising cost of living and low wage growth, recent research has found that one in five households in Australia have used payday loans[1] in the past three years. To address this need, Good Shepherd Microfinance, backed by NAB, developed a product that is better for customers by keeping the fees and costs as low as possible.
Adam Mooney, CEO at Good Shepherd Microfinance, said for the first time people will be able to access a low cost alternative that is different to anything else in the market.
“In most cases, Speckle loans are up to 50 per cent cheaper than other small cash loans. Most lenders charge the maximum fees allowed by law. As a not-for-profit program, Speckle is significantly cheaper for customers.”
“Every day we see the negative impact of high cost loans on individuals and families. In addition, the latest research shows that the number of women using short term cash loans continues to increase and women tend to use these loans at an earlier age than men[2].
“It was clear that we needed a better solution for anyone who needs to use small cash loans. Speckle will enable people to access lower cost credit when they need it most,” said Mr Mooney.
Building on their long-term partnership, NAB and Good Shepherd Microfinance have joined forces to develop Speckle using leading edge technology and with the help of skilled volunteers from across the bank.
Andrew Thorburn, NAB CEO said the bank shares Good Shepherd Microfinance’s mission to create fair and affordable financial products that address the gaps in the market.
“We know there are many people who, because of their financial situation don’t typically qualify for mainstream finance, are having to turn to payday loans. We’ve worked with our long-term partner Good Shepherd Microfinance to develop Speckle as a better alternative.
“At NAB, we want to support people to improve their financial resilience so if times get tough they can bounce back better. It’s important that everyone can access appropriate credit.
Good Shepherd Microfinance also offers no interest or low interest loans and referrals to financial counselling and other services to ensure that people are able to get the financial support they need.
To be eligible for a Speckle loan, applicants must be over 18, earn more than $30,000 a year (not inclusive of government benefits), and can’t have had two or more small amount credit contracts in the past 90 days. Where applicants are deemed unsuitable they are referred to other financial support.
Background:
About Speckle:
About Good Shepherd Microfinance and NAB’s partnership:
About payday lending in Australia:
[1]2018, Digital Finance Analytics, ‘Women and Pay Day Lending – An Update 2018, page 2
[2]2018, Digital Finance Analytics, ‘Women and Pay Day Lending – An Update 2018, page 2 & 4
[3] 2018, Digital Finance Analytics, ‘Women and Pay Day Lending – An Update 2018,
[4] Financial Resilience in Australia 2016, Centre for Social Impact and NAB
We monitor Pay Day lending – or Small Amount Credit Contracts (SACC) – as they should be called, via our surveys. We have just run our 2017 updates, and we find that SACC lending is still growing, and well above inflation and wage growth. A symptom of financial stress in the community .
Watch the video, or read the post.
But SACC lenders are targeting different borrowers now, and mainly via online channels.
This first chart shows the relative lending flows split by distressed households and stressed households. Stressed households, we define as those with cash flow problems (often thanks to poor budgeting or over commitment) but many will have other financial assets, and even may own property. Most will be in employment. Lenders are targeting this group (especially using TV, radio and online channels) and there has been substantial growth.
Distressed households are those under financial pressure, often with limited employment, and are very likely to be on Government assistance. Recent tightening of the lending rules has reduced the share of lending to these distressed groups – which is a good thing.
The overall net effect is the total lending from Pay Day providers, including the many online players – has risen to around $842m flow and $994m stock. Growth in 2015 -2016 was 10.7% and 2016-17 was 14.5%. We expect growth at least 10% in 2018, perhaps higher.
The share of loans originated online continues to rise, from 48% in 2015, to more than 75% now, and it will continue to rise further. These online services are easy to access, and borrowers, once they sign up can get “special” deals.
The online environment is of course hard to police, but the interest rates offered by many players are right at the top end of the allowable range.
The latest changes to the SACC legislation are still in the works. But we think there should be a further review looking at the online lending environment. This is clearly where the action (and risks) are. By plugging the lending to our most vulnerable households, the industry has regrouped around more affluent but needy connected households. There are more to target, and the prospect of substantial growth.
For an outline and critique of the proposed payday lending* reforms, see the following articles by Gill North (Professor of Law at Deakin University and Joint Principal of Digital Finance Analytics)
Draft versions of these papers are available at https://ssrn.com/author=905894
Defined as “small amount credit contracts” in the National Consumer Credit Protection Act 2009 (Cth)
The Consumer Action Centre and Financial Rights Legal Centre have launched a social media campaign to warn prospective Pay Day borrowers of the risks involved. Entitled Watch Your Nuts, it involves a memorable squirrel!
Fitting, as lenders themselves have been pushing into digital, and are using social media and apps to extend their reach to cash stretched households.
The digital war just stepped up a notch!
The Treasury has released exposure drafts for further reform for the Pay Day (SACC) and consumer lease sector (FINALLY)!
The exposure draft of the National Consumer Credit Protection Amendment (Small Amount Credit Contract and Consumer Lease Reforms) Bill 2017 (the Bill) introduces a range of amendments to the Credit Act to enhance the consumer protection framework for SACCs and consumer leases. The amendments contained in the Bill are to be complemented by amendments to the Credit Regulations, which will be consulted on separately at a later date.
The new SACC and consumer leasing provisions will promote financial inclusion and reduce the risk that consumers may be unable to meet their basic needs or may default on other necessary commitments. The Bill implements the Government’s response to the Review of the Small Amount Credit Contract Laws (the Review) that was conducted by an independent panel chaired by Ms Danielle Press. The Review was publicly released in March 2016. The Government’s response to the Review was released by the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, on 28 November 2016.
The Draft Bill implements the Government’s response to the Review. This includes:
- imposing a cap on the total payments that can be made under a consumer lease;
- requiring small amount credit contracts (SACCs) to have equal repayments and equal payment intervals;
- removing the ability for SACC providers to charge monthly fees in respect of the residual term of a loan where a consumer fully repays the loan early;
- preventing lessors and credit assistance providers from undertaking door-to-door selling of leases at residential homes;
- introducing broad anti-avoidance protections to prevent SACC loan and consumer lease providers from circumventing the rules and protections contained in the Credit Act and the Code; and
- strengthening penalties to increase incentives for SACC providers and lessors to comply with the law.
Deadline for submissions is 3rd November 2017.
ASIC annouced today enforcable undertaking with Payday lenders Web Moneyline and Good to Go Loans, to cease using a loan product, called OACC2, following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).
Both lenders are required to
Here are the ASIC releases:
Payday lender Web Moneyline has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).
ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Web Moneyline may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.
Under the Enforceable Undertaking , Web Moneyline is required to:
- write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
- notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
- not enter into the OACC2 loan product with any new consumers.
ASIC Deputy Chairman Peter Kell said, ‘Financially vulnerable consumers can be at particular risk from this sort of activity, and in many cases will have little real understanding of the greater risks of default they are being exposed to. ASIC will take action to protect those consumers from falling victim to unsuitable payday loans.’
All consumers with outstanding debts from OACC2 loans taken out between 21 August 2014 and 26 May 2015 are not required to make any more payments and will shortly receive communication from Web Moneyline confirming that their loan is now finalised.
Consumers who believe they may have entered into a loan contract with Web Moneyline (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au. If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options.
Payday lender Good to Go Loans has entered into an Enforceable Undertaking with ASIC to cease using a loan product following concerns raised by ASIC that the product may not have complied with the small amount credit contract provisions under the National Consumer Credit Protection Act 2009 (National Credit Act).
ASIC’s investigation identified that the loan product, called OACC2, was provided to consumers on terms which fell outside the definition of a small amount credit contract. However, on the same day consumers entered into an OACC2 loan, almost all of the OACC2 agreements were modified to repay the loan at higher regular repayment amounts over a shorter period of time, which may have exposed consumers to a higher risk of default. Good to Go Loans may have charged above the cap on fees and charges had the loans been construed as small amount credit contracts as defined under the National Credit Act.
Under the Enforceable Undertaking, Good to Go Loans is required to:
- write off all outstanding OACC2 loans including any outstanding debts which have arisen as a result of entering into these loans;
- notify the relevant credit reporting body that these loans have been settled, in order to correct the affected consumers’ credit records; and
- not enter into the OACC2 loan product with any new consumers.
ASIC Deputy Chairman Peter Kell said, ‘ASIC will continue to take action to protect financially vulnerable consumers, many of whom are recipients of welfare payments, from falling victim to unsuitable payday loans.’
All consumers with outstanding debts from OACC2 loans taken out between 18 May 2014 and 20 May 2015 are not required to make any more payments and will shortly receive communication from Good to Go Loans confirming that their loan is now finalised.
Consumers who believe they may have entered into a loan contract with Good to Go Loans (either in-store or online) that was unsuitable, are encouraged to lodge a complaint with the Financial Ombudsman Service (FOS) on 1800 367 287 or info@fos.org.au. If you need help lodging a complaint with FOS, you can talk to a free and independent financial counsellor by ringing the National Debt Helpline on 1800 007 007 during business hours. ASIC’s MoneySmart website has useful guidance on how payday loans work and alternative credit options
The law applying to small amount credit contracts (a.k.a Pay Day Loans) was reviewed by Government in late 2015 and a final report was released in March 2016.
In November 2016, essentially the Government accepted many of the recommendations, and said it will legislate the changes in 2017, with some grandfather provisions for existing contracts. A further review is proposed in 3 years time.
A key recommendation was to establish a new affordability cap. But will this be effective?
Gill North, Professorial Research Fellow, Law School, Deakin University has published an academic article which reviews the state of play- Small Amount Credit Contract Reforms: Will the Affordability Cap Achieve its Intended Objectives Without Unintended Adverse Consequences?
Specifically she questions the efficacy of the proposed affordability cap and calls for for an independent review of the business model and practices of small amount lending.
The stated objectives of the review were to allow consumers to access credit fairly and without excessively large debt burdens, and to establish regulatory settings that allow the industry to remain commercially viable. In November 2016, the Coalition Government accepted most of the review recommendations, including recommendation one that establishes a new affordability cap for all consumers seeking small amount credit contract loans.
Recommendation one is the central reform to enhance consumer protection, but is highly contentious. Consumer groups support it, but the industry body argues that consumers will be disadvantaged due to more limited access to credit and higher fees than at present.
The article explores these arguments and highlights possible outcomes that may arise from the introduction of a broad affordability cap. It ultimately concludes that available information is inadequate to properly assess the risks and likely impacts of enacting recommendation one.
Consequently, it calls for an independent review of the business model and practices of small amount lending to confirm that the affordability cap reform will achieve its stated objectives and will lead to better long-term consumer outcomes without unintended adverse consequences.
The article is available for download.
DFA had previously completed detailed analysis of households and their use of small amount credit contracts, a.k.a. payday lending. That report is still available.
Note this is looking at short term credit. If you are after our recent work on mortgage defaults and household financial stress, please follow this link:
Fair Disclosure: I am related to Gill North.
ASIC says, following ASIC action, the Federal Court has today fined payday lenders Fast Access Finance Pty Ltd, Fast Access Finance (Beenleigh) Pty Ltd and Fast Access Finance (Burleigh Heads) Pty Ltd (the FAF Companies) a total of $730,000 for breaching consumer credit laws by engaging in credit activities without holding an Australian credit licence.
The FAF Companies operated under a business model where consumers seeking small value loans (of amounts generally ranging from $500 to $2,000) were required to sign documents which purported to be for the purchase and sale of diamonds in order to obtain a loan.
ASIC alleged in its claim that the purchase and sale of diamonds was a pretence, because there were no diamonds involved in the transaction and consumers had no intention of buying or selling diamonds. Rather, the diamond purchase and sale contracts were designed to camouflage what, in reality, were loan transactions to which the National Consumer Credit Protection Act 2009 (National Credit Act) applied.
The Court handed down today’s penalty following its decision on 30 September 2015 that the arrangements for the sale of diamonds ‘comprised a pretence or sham, brought into existence as a mere piece of machinery, to conceal the true nature of the transaction, which was the provision of credit. Neither side intended that the Sales Agreement should create the relationship of vendor and purchaser….’
The Court also found that that the FAF Companies ‘intended to conceal the true nature of the transaction from those responsible for enforcing the interest cap’ (refer: 15-278MR).
In handing down the penalty, the Federal Court stated that ‘Although the excessive interest paid by each customer may not have been large in absolute terms and by some standards, it was no doubt substantial for the customer in question. Such customers have little chance of recovering anything from any of the respondents. The most heinous aspect of the case is the deliberate and pre-meditated exploitation of these vulnerable people.’
In determining the appropriate penalties, the court took into account that:
- the diamond model was designed to conceal the true nature of money-lending transactions. The underlying reason for such concealment was to circumvent the limit upon the rate of interest which was 48%.
- FAF, and its controlling officers must have had at least a strong suspicion that the diamond model was contrary to the relevant legislation.
- There had been little or no cooperation with ASIC.
- As between FAF Beenleigh and FAF Burleigh Heads, any difference in penalty should reflect the small number of transactions which have been proven against FAF Beenleigh as compared to the number proven against FAF Burleigh Heads. FAF was the designer of the diamond model and encouraged its use by its franchisees. It must be seen as being more culpable for each of the contraventions in which it was involved, than was either FAF Beenleigh or FAF Burleigh Heads.
Deputy Chairman Peter Kell said, ‘ASIC will continue to crack down on lenders who use avoidance models in an attempt to deprive consumers of these important protections.’
